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A club convergence analysis of financial integration: cross-country evidence

Vaseem Akram (Economics and Business Environment Area, Indian Institute of Management Jammu, Jammu, India)
Sarbjit Singh (Economics and Business Environment Area, Indian Institute of Management Jammu, Jammu, India)
Pradipta Kumar Sahoo (School of Social, Financial and Human Sciences, Kalinga Institute of Industrial Technology, Bhubaneswar, India)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 23 March 2023

Issue publication date: 22 August 2023

271

Abstract

Purpose

The purpose of this study is to examine the club convergence of Financial integration (FI) in the case of 60 countries from 1970 to 2015. FI plays a vital role in economic growth through sharing the risk between countries, cross-border capital association, investment and financial information. It also leads to the efficient allocation of capital and capital accumulation, thereby improving the systematic growth and productivity of the economy. Literature on examining the convergence hypothesis of FI is scarce.

Design/methodology/approach

This study applies the clustering algorithm to identify club convergence, advanced by the Phillips and Sul test, which enables the identification of multiple steady states or club convergence, unlike beta and sigma convergences.

Findings

The findings indicate the non-convergence when all 60 countries were taken together. This highlights that the selected countries' have unique transition paths in terms of FI. Hence, the authors implement the clustering algorithm, and the estimation shows that 56 countries are categorised into three different clubs. However, for the rest of four countries, the results are sort of ambiguous, favouring neither convergence nor divergence.

Practical implications

On the basis of three country clubs, Club 1 presents the model countries such as the Netherlands, Singapore and Switzerland. The Club 2 and Club 3 countries can start making moves towards the model countries by making policy adaptations for trade, finance and business facilitation.

Originality/value

The existing literature provides a plethora of studies investigating the convergence of stock markets, exchange rates and equity markets, but studies on the convergence of FI, particularly across the countries, are scarce. This study contributes by bridging this gap. The study is unique in its type as it takes into account the multiple steady states or club convergence. This study also contributes in policymaking by suggesting Club 1 countries (the Netherlands, Singapore and Switzerland) as the model ones for the FI.

Keywords

Acknowledgements

The authors gratefully acknowledge valuable suggestions from anonymous referees and the guest editor, Professor Paresh Kumar Narayan. The authors are very grateful to the discussants and other participants for their valuable feedback during the presentation at the 16th BMEB International Conference organised by Bank Indonesia.

Citation

Akram, V., Singh, S. and Sahoo, P.K. (2023), "A club convergence analysis of financial integration: cross-country evidence", Studies in Economics and Finance, Vol. 40 No. 4, pp. 647-660. https://doi.org/10.1108/SEF-11-2022-0543

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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